The Canadian railways are among the “moatiest” of companies on the entire TSX Index. Even as the broader markets gravitated higher in recent months, the top railway stocks haven’t exactly been red-hot. With a Canadian recession potentially a few quarters away and a Bank of Canada (BoC) that may still have a few more 25 bps rate hikes up its sleeve, it seems like holding off on the cooling rail stocks is the best course of action at this juncture.
That said, history suggests buying the dip in Canada’s top rails is a profitable endeavour, at least over the long run. Indeed, recessions take a toll on any firm that’s economically sensitive. What separates the top rail firms like CN Rail (TSX:CNR) and CP Rail (TSX:CP) is their history of recovering rather swiftly from any periods of negative economic growth. To put it simply, the rails tend to play a key role in the recovery and advance well before the economy has a chance to surge higher.
In this piece, we’ll compare the two rails and their current valuations to see which, if either, is a good pick for your TFSA (Tax-Free Savings Account), RRSP (Registered Retirement Savings Plan), or non-registered account. Without further ado, let’s have a closer look at the two rail titans.
CN Rail
CN Rail’s rail network is still the envy of many, even after its top peer, CP Rail, merged with Kansas City Southern. After the big deal, CN and CP seem to be on a more even playing field. Despite this, CP still has plenty of expenditures to bring out the most in its newly acquired rail assets.
CN really wanted to go after Kansas City Southern as well. Ultimately, CP got its way. And though it seems unlikely that CN will get a U.S. rail deal of its own done at any point in the near future, I still see ample opportunity for CN’s new CEO Tracy Robinson to find ways to enhance efficiencies and drive down the operating ratio (an efficiency gauge for the rails, in which a lower number is better).
Up ahead, CN Rail faces uncertainty as recession risks approach. After a sluggish 2022 for broader markets and an 11% pullback off of late-2022 highs, I do think expectations have become quite modest such that the stock could end 2023 in a much higher spot, even once the recession does finally happen.
CN Rail is one of those great companies you need not worry about too often. The 2.1% dividend yield is bountiful and could grow to contribute a huge part of your TFSA’s income stream in a decade or two from now!
CP Rail
CP Rail isn’t just CN’s smaller brother in the Canadian rail scene anymore. It’s a powerful rival with Kansas City Southern’s rail aboard! Further, CEO Keith Creel is a man who knows how to get the job done. As CP looks to new horizons, I think it’ll be tough to stop the momentum in the freight train.
After plunging over 8% from its recent high, I view CP stock as a great buy on the dip. Recession or not, the company has a plan and odds are it will execute effectively with its exceptional managers. The stock sports a modest 0.76% dividend yield that’s safe and could grow at a sound rate through the next decade and beyond.
The better buy for rail investors?
I don’t think either rail is a bad bet going into July 2023. If I had to choose one, it’d be CN. Why? It’s the cheaper stock at 19.3 times trailing price-to-earnings versus CP’s 25.6 times trailing price-to-earnings. Further, the larger dividend yield of CNR stock also has my attention as a lover of passive-income plays.
